The Future of Payments

While payments was the primary use case highlighted in the original Bitcoin whitepaper in 2008, recent developments over the last few years have made blockchain-based payments increasingly viable, never mind preferable, when compared to traditional payment methods. With billions of dollars deployed over the last decade into developing the underlying blockchain infrastructure, we now have systems that can operate at “payments scale."

Blockchains are on a "Moore's Law"-like cost and performance curve, where the cost to store data on blockchains has fallen several orders of magnitude in just the last few years. Following Ethereum’s Dencun Upgrade (EIP-4844), Layer2 environments like Arbitrum & Optimism have median cost per transactions of ~$0.01, while modern alternative Layer1s are quickly approaching fractions of a penny.

Alongside more performant and cost-effective infrastructure, the rise of stablecoins has been explosive and persistent, and clearly stands out as a secular trend among the otherwise volatile crypto industry. Visa’s recent launch of its public-facing stablecoin dashboard (Visa Onchain Analytics) provides a glimpse into this growth and demonstrates how stablecoins and the underlying blockchain infrastructure are being used to facilitate payments globally. Stablecoin transaction volumes across the market are up ~3.5x year-over-year. When focusing the analysis on volumes that appear to be directly initiated by consumers and business (excludes automated trading or smart contract operations), Visa estimates stablecoin transaction volumes over the last 30 days to be ~$265 billion (~$3.2 trillion annualized run rate). To put that into perspective, that is ~2x PayPal’s payment volume in 2023 (from their 2024 annual report) and approximately equivalent to the GDP of India or the UK.

We’ve spent a lot of time digging into the underlying drivers of this growth and are convinced that blockchains have significant potential to be the future of payments.

Payments Industry Context

In order to grasp the fundamental drivers of growth in the crypto payments market, we must first understand some historical context. The payments infrastructure we use today in the US and internationally (e.g., ACH, SWIFT) was built more than 50 years ago in the 1970s. The ability to send money around the globe was a groundbreaking achievement and a milestone in the world of finance.

However, the global payments infrastructure is now largely antiquated, analog, and fragmented. It is an expensive and inefficient system that operates within limited banking hours and relies on many intermediaries. One of the notable issues with the current payment infrastructure is the lack of a global standard. Fragmentation hinders seamless international transactions and creates complexities in establishing consistent protocols.

The emergence of real-time settlement systems has been a significant advancement in recent times. The success of real-time payment schemes internationally such as UPI in India and PIX in Brazil has been well-documented. In the US, government and consortium-led efforts have been made to introduce real-time settlement systems such as Same Day ACH, RTP by the Clearing House, and FedNow by the Federal Reserve. The adoption of these new payment methods has been muted and the fragmentation across a number of competing interests poses a great challenge.

Fintech companies have tried to provide UX improvements on top of this legacy infrastructure. Players like Wise, Nium, and Thunes, for example, enable customers to pool liquidity in accounts around the globe so that they can make transactions feel like they’re instant for the user. However, they don’t rectify the limitations of the underlying payment rails and are not capital efficient solutions.

The Complexities of Payments Today

Given the fragmented nature of incumbent financial systems, payments transactions have become increasingly complex. This situation is perhaps best exemplified by looking at the anatomy of a cross-border payments transaction, which contains a number of pain points:

• Multiple Intermediaries: Cross-border payments typically involve multiple intermediaries such as local and correspondent banks, clearing houses, FX brokers, and payment networks. Each intermediary adds layers of complexity to the transaction process, leading to delays and increased costs.

• Lack of Standardization: The lack of standardized processes and formats can lead to inefficiencies. Different countries and financial institutions may have varying regulatory requirements, payment systems, and messaging standards, making it challenging to streamline the payment process.

• Manual Processing: Legacy systems lack automation, real-time processing capabilities, and interoperability with other systems, resulting in delays and manual intervention.

• Lack of Transparency: The opacity of the cross-border payment process can contribute to inefficiencies. Limited visibility into transaction status, processing times, and associated fees can make it difficult for businesses to track and reconcile payments, leading to delays and administrative overhead.

• High Costs: Cross-border payments often incur high transaction fees, exchange rate markups, and intermediary charges.

It’s not uncommon for cross-border payments to take up to 5 business days to settle and cost on average 6.25%. Despite these challenges, the market size for B2B cross-border payments is massive, and it only continues to grow. FXC Intelligence estimates the total market size of B2B cross-border payments was $39T in 2023 and is projected to grow 43% to $53T by 2030.

It's clear that real-time settlement is critically needed and a globally unified payments standard does not exist yet. There is a solution that is accessible to all and can move value around the world instantly and cheaply—blockchains.

The Adoption of Crypto Payments

Stablecoin-enabled payments offer the ideal solution to the challenges that currently exist in areas like cross-border payments, and stablecoins are experiencing secular growth across the globe. Aggregate stablecoin supply as of May 2024 is approximately $161B. USDT and USDC represent the #3 and #6 cryptoasset by market cap respectively. While together they account for ~6% of the total crypto market cap, they represent ~60% of onchain transaction value.

Looking back to our cross-border payments example, the simplified flow of funds offered by blockchain rails provides an elegant solution to the complexities that exist in the status quo:

• Near Instantaneous Settlement: Compared to most traditional financial payment methods that take days to settle, blockchain rails can settle transactions near instantaneously globally.

• Lower Costs: Due to the elimination of various intermediaries and superior technology infrastructure, crypto enabled payments can offer meaningfully lower costs compared to incumbent offerings.

• Higher Visibility: Blockchains offer much greater levels of visibility as it relates to tracking fund movements and alleviating the administrative overhead of reconciliations.

• Global Standard: Blockchains provide a “high speed rail” that anyone with an internet connection can readily access.

By utilizing stablecoin rails, payments can be radically simplified in terms of the number of intermediaries involved. As a result, there is real-time visibility into fund movements, much faster settlement times, and significantly lower costs compared to traditional payment methods.

Crypto Payments Stack Overview

As we look at the market for crypto-enabled payments, there are four primary layers to the stack:

Settlement Layer

The underlying blockchain infrastructures that settle transactions. Layer1 blockchains like Bitcoin, Ethereum, and Solana, as well as general purpose Layer2 environments like Optimism and Arbitrum, are all in the business of selling blockspace to the market. They compete across a number of vectors including speed, cost, scalability, security, distribution, etc. We expect the payments use case to be a substantial consumer of blockspace over time.

Asset Issuers

Asset issuers are entities responsible for creating, maintaining, and redeeming stablecoins, a type of cryptoasset designed to maintain a stable value relative to a reference asset or basket of assets, most typically the US dollar. Stablecoin issuers typically have balance sheet driven business models analogous to banks where they take in customer deposits and invest them into higher yielding assets like US treasuries and then issue stablecoins as liabilities, profiting from the spread or net interest margin.

On/Off-Ramps

On/Off-ramp providers play a critical role in enhancing the usability and adoption of stablecoins as a primary mechanism for financial transactions. At a fundamental level they serve as the technology layer that stitches together stablecoins on blockchains to fiat rails and bank accounts. Their business models tend to be flow driven and capture a small take rate on the amount of dollars that flow through their platforms.

Interfaces / Applications

Front-end Applications are ultimately the customer-facing software of the crypto payments stack that provide the user interface for crypto-enabled payments and utilize the other parts of the stack to enable such transactions. Their business models vary but tend to be some combination of a platform fee plus some flow driven fees on volumes through their front-ends.

Emerging Trends Across the Crypto Payments Landscape

There are a number of trends that we’re excited about at the intersection of crypto and payments:

Cross-Border Payments is the First Battleground

As described above, cross-border transactions are routinely the most complex, inefficient, and expensive with numerous intermediaries extracting rents along the way. It is maybe unsurprising then that this is where we are seeing the most organic uptake from the market for alternative, blockchain-based payment solutions. Providers who are enabling both B2B payments (paying vendors and employees, corporate treasury management, etc.) and remittance use cases are seeing strong traction in the market.

We view cross-border payments similar to logistics, where the “last mile” (the on and off-ramps between fiat<>crypto) is especially challenging to navigate. This is where businesses like Layer2 Financial* are providing real value as they take on the heavy lifting of integrating with various crypto and fiat partners on the back-end (blockchains, custodians, exchanges/liquidity providers, banks, traditional payment rails, etc.) and provide a seamless and compliant experience for their customers. Layer2 also helps facilitate the highest speed / lowest cost route for transactions and is able to settle the full lifecycle of a cross-border payment using crypto rails in as fast as ~90 minutes—up to 1-2 orders of magnitude faster than existing solutions.

Given the cost and efficiency gains, we are seeing uptake across all geographies and end customers, crypto-natives and traditional businesses alike. There is a particular demand in regions with less stable fiat currencies and poor access to USD. Africa and Latin America have been hot beds of entrepreneurial activity for these reasons. Mural*, for example, has seen tremendous success helping customers facilitate vendor and developer contractor payouts between US and LatAm.

Early-Innings of Supporting Payment-Grade Infrastructure

Most of the market infrastructure surrounding the crypto ecosystem (e.g., custody platforms, key management systems, liquidity venues) was built primarily for retail trading as the main use case. This has matured over the years to include more enterprise/institutional-grade software and services, but generally the infrastructure was not built to support the real-time nature and scale of payments.

We are seeing opportunities for new entrants and incumbent providers to launch/expand their offerings to capture this emerging use case. For example, new custody/key management systems like Turnkey* have improved transaction signing by ~2 orders of magnitude, enabling 50-100ms signing latency for millions of wallets. They also enable companies to design policies around asset operations to enhance automation and process scalability.

Liquidity partners are also retooling their products to offer more frequent (ideally real-time) settlement capabilities for on/off-ramp providers. More automation is coming across the board, which will provide an even more superior experience for end users.

Onchain Yield Will Change the Game

Issuing digital fiat currency on a blockchain is the first instantiation of a much broader trend toward tokenization. As mentioned above, the significant growth we’ve seen in stablecoin adoption is further underscored by the fact that holders of these assets have not been able to earn yield on their holdings (relative to 4-5% on US Treasuries).

Tether and USDC dominate the current stablecoin landscape today, accounting for 90%+ of the ~$160B stablecoin market. We have more recently seen a spectrum of new entrants, offering onchain yields in different form factors. Stablecoin issuers like Agora*, Mountain, and Midas are offering dollar-pegged, yield-generating assets/programs to offer yield/rewards to holders. We have also seen a host of tokenized US Treasury products from the likes of BlackRock, Franklin Templeton, Hashnote, and Superstate* be created to offer yield onchain. Lastly, we are seeing creative tokenized structured products like Ethena* offer a synthetic dollar-pegged asset that uses the ETH basis trade to offer yield onchain.

We expect these new assets to be massive catalysts in the expansion of onchain finance broadly speaking. A marketplace of yield-bearing assets is being born and we see a future where users can leverage specific instruments depending on the use case, their risk/reward preferences, and the geographies they’re operating in. This could have a transformational effect on financial services across the globe.

Early Signs of More Stablecoin Utility

While stablecoins have clear product-market fit across a variety of use cases, non-crypto-natives (consumers and businesses) generally operate their day-to-day lives in the fiat world. Businesses may be comfortable leveraging stablecoins and blockchain rails to execute cross-border payments, for example, but most companies today prefer to hold and accept fiat.

One blocker has been the ability for businesses to accept stablecoin payments. Stripe’s recent announcement to support the acceptance of stablecoins for their merchant customers is not only important validation, but also a massive shift in the status quo. It could give consumers more choice in terms of payment options and get businesses more comfortable accepting, holding, and transacting with digital assets.

Another blocker has been the ability to spend stablecoins. Visa’s expansion of stablecoin settlement capabilities supports tighter interoperability between blockchains and card networks. As an example, we’re seeing stablecoin-backed card products, which allow cardholders to spend their stablecoins everywhere that accepts Visa cards, experience impressive organic demand in the market.

As stablecoins become more widely accepted and spendable across traditional payment methods, the more we expect these digital assets will become ubiquitous alongside their non-digital counterparts.

Conclusion

Blockchain-based payments is one of the most important and exciting trends we see at the intersection of crypto and financial services. We believe blockchains will be used to settle a growing number of financial transactions and payments are poised to be a key use case and a primary consumer of blockspace going forward. If you are starting/building a company in this space, we’d love to hear from you. Say hi @MG_GLXY on Telegram or @mgiampapa1 on X.

* Represents Galaxy Ventures portfolio company.